What I mean is because the rent covers your interest repayments & other associated costs, would banks keep on lending you money to buy cashflow-positive properties?? If so, then you could buy 100 properties plus in a year.
Hi,
I'm really interested in the answer to this question, and put together my investment plan a year ago hoping it would be the case. I did expect that the growth rate would be limited by the amount of equity though. All the banks I've ever used always needed me to kick in something, eg a 10%-20% deposit. So I could only expect to add new properties as my deposit equity grew.
So I figured that (since I have a fair bit of starting equity) I could go on a CF+ shopping spree, buy a number of properties to consume the equity I have, then wait. After a year, I would get the properties revalued, which should create some more equity. This new equity could then be used as deposits on new property etc and on it goes. So, I expected that I would be limited by the rate at which the underlying equity grew.We are now several properties into this plan, and I'm starting to get noises from my lenders that serviceability is becoming problem. To me this is ridiculous, as our properties are CF+ (or neutral), we have no other debt (not on PPoR, not on cars, not on CC's), and have surplus income each month to reduce the IP loans by a few grand. It looks like I've got capacity to make maybe 1-2 more investments, but that's it. (My plan was for about another 6 at this point).
When the lenders look at what you can afford to borrow, they don't allow for ALL the rental income (maybe 70-80% only). This means that as far as they are concerned, you have a collection of negatively geared properties, and you can only afford so many of them.
So these are 2 of the limiting factors on your (and my) world domination plans
. When I find a way around the servicability limitation, I'll get back to working on the equity limitation….Rgds,
Daedalus.I also have the same problem with serviceability, we had found several properties with amazing CF+ and potential, but the banks wouldnt service us…..because I also have a large family then 4 children, now I have 5.
I cant stand that they tell you what you can and cant afford I only have a PPOH and 1IP, and now Im stuck and its frustrating seeing all opportunities go by and house prices getting further out of your reach…….so I have been knuckling down paying extra off our PPOH mortgage and doing things around the home that will hopefully give us a bigger valuation, another thing that could give you better serviceability is to earn more per year…LOL, I dont want to sell my IP, its in a bad area and I have a good tenant,
typing this reminds me of how frustrated I am about our limboness!!!
Good on you Daedalus for having a great portfolio!Cheers CM,
I think that the servicability rules are developed for the masses. Fair enough. They should have another set of rules though for people who are putting effort into their financial future….
I found out that WRT servcicability, your Credit Card credit limits are used to calculate serviceability, not the balances. So even if you pay them down every month, it doesn't matter. However, I'm told that if you can provide 3 months' worth of statements showing that you pay them down, some lenders will increase your servicability. The other option of course, is to get rid of them or reduce the credit limits – which I've already done once.
There must be some other sources of finance out there to cover this kind of situation. The limitation might be that we are looking to home loan products for our financing, and they bring with them these servicability rules. Perhaps another type of finance would look at servicability a different way…
Daedalus
hey guys,
You might want to look into investing under a company/trust structure so that you don't actually own anything personally. That way when one entity becomes maxed out with one bank, you start a new one and go to new bank. provided you can keep finding deposits, in theory you can just keep buying.Good luck,
MortyHi Morty
Don't want to burst the bubble on your idea but it doesnt work.
As a Director of the Company or Trustee of the Trust you are obliged to disclose any liabilities you guarantee and I am sure if you do a search you will find that this topic has been bought up a number of times.
If you wish to carry on purchasing properties and the Bank believe your serviceability is maxed out then why not consider a nodoc / lodoc 2nd mortgage. Admitedly the interest rates are a fair bit higher than mortgaged rate but often it is for only 10% of the purchase price and you can always make this principal & interest to reduce the debt.
I process a fair amount of this type of lending for clients.
Richard Taylor | Australia's leading private lender
Hi Richard,
"but often it is for only 10% of the purchase price"
Could you elaborate on this please? Won't the serviceability over the other 90% still be a problem? I can understand if the no/lo-doc is over the whole purchase…
Cheers
Daedalus
Hi Daedalus
Such private lenders do this on a lodoc basis so we arrange a 90% lodoc deal for the client and then top up the balance with private funding.
Hope this makes sence.
Richard Taylor | Australia's leading private lender
Hello all,
I'm new to this forum. My family (hubby and 3 kids) currently have 3 positive IP's with settlement occurring on the 4th in Jan. I just want to say that I'm not familiar with the Investor talk and having trouble deciphering what you saying. Please help this newby. What is nodoc/ lodoc, WRT, PPOH? I know this sounds really ignorant, but I have never been to any seminars, nor to any websites about investing before. I have just really stubbled into it and been VERY VERY lucky with the first place we bought but have now sold. And one more thing? I have all our loans on principle and interest loans. Why am I reading that this is not the way to go. My figuring is that if they are all positive cash flow properties, as all ours our, then by having the loans prinincle and interest we are just reducing the debt quicker with a slightly lower interest rate from principle only( with the bank we use). Although in the long term I understand that this will limit our capacity to service the loans if we buy another 6 or 7 or 130. Is this the only reason because if so it is my aim to pay them down as quickly as possible and eliminate a couple in the next few years, therefore this stratagy does not make sense to me unless you are wishing to just keep borrowing. What happens after the loan becomes principle and interest. Is it the theory that by then rents will have risen and the debt will be more serviceable as principle and interest.
Thank in advance ofr your help,
Jodie
PS I feel really out of my depth on this forum.Hi JL,
I'm pretty new to the forum too, and it takes a bit of reading between the lines to pick up some of the terminology. However, here's a link to a glossary with a lot of property stuff in it: http://www.somersoft.com/forums/showthread.php?t=9382.
Some abbreviations are Internety ones, such as WRT (with respect to), IMHO (in my humble opinion) etc. More can be found here: http://www.gaarde.org/acronyms/
You sound like you're doing pretty well, congratulations!
Daedalus.
Hi Jodie
Nodoc and Lodoc abbreviations refer to lending definations when it comes to income evidence.
Nodoc = No documentary evidence of income required. You would merely sign a statement confirming you can afford to service the loan and subject to everything else you are away.
Lodoc = Limited Documentary Evidence required. Usually the borrower is required to state their income and this is what the lender will take rather for the loan assessment rather than ask for normal evidence of income such as payslips or Tax returns.
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Hi MortyDon't want to burst the bubble on your idea but it doesnt work.
As a Director of the Company or Trustee of the Trust you are obliged to disclose any liabilities you guarantee and I am sure if you do a search you will find that this topic has been bought up a number of times.
If you wish to carry on purchasing properties and the Bank believe your serviceability is maxed out then why not consider a nodoc / lodoc 2nd mortgage. Admitedly the interest rates are a fair bit higher than mortgaged rate but often it is for only 10% of the purchase price and you can always make this principal & interest to reduce the debt.
I process a fair amount of this type of lending for clients.
Hi Richard,
I've just been doing the homestudy masterclass and Steve in his course said that that's the structure that he used.
He said that on the form (when applying for a 2nd loan) with Bank 2 – there is a area that asks are you a "guarantor" for any other loans – to which you do answer yes to. Then the 2nd bank can go and do a credit check however as you are listed only as a guarantor, therefore the debt is not in your name and should then allow you to continue borrowing as it's not debt until that loan under that structure is defaulted?
Or has the rules changed since then?
Thanks!
Vstar
Since you have guaranteed some loan, they new lender will want to make sure you can afford to pay these as well as any new borrowings. Having a new structure wont really help much unless the new lender has a vaguely worded application form and they fail to do credit checks, or if they do, they dont ask too much.
When lenders lend, they factor in many things beside rent. Even the rent, they will only take in a certain percentage, roughly 80%. They also look at other income and existing loan which they use a buffer to calculate the interest (factoring in rate rises). They may also assume the loans are PI.
So you would need a very good rent to service. But then the lenders may cap the maximum they will lend to anyone client. There may be restrictions on the number of properties in one area. Country areas may need more deposits etc.
But with careful planning you should be able to go far.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Vstar
I think you will find Steve has clarified this point on many an ocassion subsequently.
Regretfully it just doesnt work like that.
Richard Taylor | Australia's leading private lender
. When I find a way around the servicability limitation, I'll get back to working on the equity limitation….
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